Inflated prices – вздутые цены

net cash – чистый платеж наличными

cast out – нехватка (отсутствие) наличных денег

healthy increase – существенное увеличение

net worth – собственный капитал

at best – в лучшем случае

hedge against inflation – гарантия от инфляции

The hottest topic in money these days is undoubtedly real estate. In many areas residential real estate has enjoyed double digit price increases over the past several years.

Understandably, most real estate industry sources contend that real estate is now achieving fair value after years of relative underperformance and is likely to continue strong performance because of supportive demographic trends. Almost everybody would agree that real estate is one of the core engines of economic growth.

As any realtor will tell you, all real estate markets are local, but all local markets are heavily influenced by macroeconomic conditions such as interest rates and demographics.

The Home as a Financial Asset

Property assets can be divided into three distinct categories: undeveloped land, owner-occupied, and rental. Each has specific financial properties and must be evaluated in the appropriate way.

Undeveloped or raw land is a capital gain asset. It is purchased with the intention of either developing it or selling it in the future at a profit. Raw land is easy to hold. It requires little or no maintenance and has negligible carrying costs (taxes on гaw land are usually very low). Raw land typically generates no income, so the only way to profit from raw land is to sell it for a profit. Raw land for resale is typically a very long-term investment.

Many fortunes have been made by purchasing lands in areas just outside cities and waiting for growth to extend city boundaries into to undeveloped areas. But this may take decades and there may be more productive use of those funds in the mean time. Raw land investment must be evaluated in terms of the potential capital gains on the future sale of the property versus the opportunity cost of tying up that capital for many years.

As opposed to raw land, rental property is a cash flow asset. All developed property has carrying costs. These include maintenance, insurance, property taxes, financing, etc. These costs are relatively fixed and unavoidable. Most rental property carries a mortgage. The mortgage creates leverage that allows the property owner to utilize a relatively small amount of capital to purchase expensive rental property. The mortgage is usually the largest fixed cost in a property. A good rental property generates cash flow in excess of its carrying costs. Some owners purchase properties that have carrying costs in excess of rental income. This is negative cash flow and is very dangerous. These owners are speculators who are expecting the price of the property to rise over the near-term so it can be resold to another speculator for a profit. If the price does not rise, these owners are in a difficult position. They are stuck with an overpriced property that is draining capital and is typically either sold at a loss or allowed to foreclose. In rental property, the bulk of profits are expected to be from cash flow, capital gains are an added bonus.

Owner-occupied real estate incurs all of the costs associated with any other developed property. All of the maintenance, insurance, taxes, and financing costs incurred by rental property also apply to owner-occupied property. However there is no corresponding income generated from the property to offset those costs. Owner-occupied real estate is a pure expense. Whether rented or owned, housing always costs money. If it costs less to own a home than to rent a similar property, then it makes sense to own. For most homeowners, their property has value far in excess of its market price. Quality-of-life factors may lead some people to pay premium prices for homes regardless of the financial considerations. An owner-occupied home has many valuable financial characteristics. It offers tax shelter due to the deductibility of home mortgage interest. It also represents collateral to a lender which allows the owner access to low-cost credit that may also be tax deductible.

Most homeowners expect the market value of their property to rise over time. Higher real estate values give homeowners a sense of wealth that is often reflected in a greater propensity to consume. But this feeling of enhanced wealth is somewhat misplaced. It is true that higher real estate values can be easily tapped and spent, but this does not mean that homeowners have greater real wealth. People always need somewhere to live. If a homeowner attempts to capture the capital gains in a primary residence by selling it, that person must find another residence at equally inflated prices. To realize net positive cash on the sale of a primary residence, the hоmеоwnеr must purchase a less expensive replacement home, rent a residence, or go deeper into debt. All of these cash-out options imply a lower standard of living.

The economics of home ownership is clear. Although homeowners experience a healthy increase in their nominal net worth over time, any attempt to use that wealth for other purposes will result in a lower standard of living. At best, a primary residence is an excellent hedge against inflation. It is not a good source of capital gains. Any gains realized from the sale of a primary residence will usually be consumed by its replacement.

Ex.1 Give Russian equivalents:

the hottest topic in money; fair value; is likely to continue; because of; demographic trends; to be heavily influenced by; specific financial properties; with the intention of; to profit from raw land; this may take decades; as opposed to raw land; insurance; to expect the price of the property to rise; an added bonus; an owner-occupied real estate; regardless of the financial considerations; the feeling of enhanced wealth; to go deeper into debt; a lower standard of living; any attempt to use smth. for other purposes; a source of capital gains.

Ex.2 Give English equivalents:

самая злободневная тема в финансовой сфере; взаимосвязанные структуры рынка недвижимости; за последние несколько лет; продолжать стабильно развиваться; основной двигатель экономического роста; оценить соответствующим образом; в будущем выгодно продать; неокультуренная (незастроенная) земля (2варианта); покупать землю за городом; относительно небольшая сумма денег; перепродать имущество; иметь смысл; цена намного выше рыночной; ожидать, что стоимость имущества со временем вырастет; (при)дать ощущение возросшего благосостояния; прибыль от продажи первичного жилья.

Ex.3 Answer the following questions:

1. What is the hottest topic in money these days?

2. Due to what factor is real estate achieving fair value now?

3. What conditions are all local real estate markets greatly influenced by?

4. What categories can property assets be divided into?

5. Why is raw land easy to hold?

6. What do carrying costs include?

7. What property carries a mortgage?

8. Why do most homeowners expect the market value of their property to rise over time?

9. Is primary residence a good source of capital gains? Why?